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Concerns over excessive volatility
RECORDER REPORT
KARACHI (May 10 2008): State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar has expressed concerns over the excessive volatility and weakened exchange rates and commented that the recent behaviour of the exchange market was "totally out of line".

At a meeting with heads of commercial banks at the State Bank of Pakistan in Karachi, she said: "We are not in a crisis-like situation, and several measures are in place to remove the macro-economic imbalances."

The government has expressed its firm resolve to bring down the fiscal deficit, retire borrowings from SBP, and cut non-developmental expenditures, she said. "There is a strong recognition that macro-economic imbalances have to be resurrected and this is the cornerstone of the government's economic policy," she added.

Dr Akhtar informed the meeting that the government has taken steps to mobilise foreign funds, and added that some inflows, which are expected to realise soon, included $2.1 billion from multilateral banks, $500 million from friendly countries, $200 million for earthquake relief, $100 million from UFID, $700 million from MCB Bank's stake sale, $100 million from Barclays Bank, and the rest through private sector GDRs and other regular sources.

She said that the government was also taking measures to control inflation, and added that the central bank would continue to remain in a monetary tightening phase. Given these facts, the SBP Governor said: "Current rupee volatility is not reflective of the macro-economic fundamentals."

She said that she was perplexed over recent interbank market behaviour, and urged the banks to play a proactive role to kill the negative sentiment in the market. She said that the SBP had made timely and effective interventions in the market, and added that any future interventions by the central bank would be in accordance with its analysis of the situation. The SBP was vigilant of the situation and would take necessary steps as the situation warranted, she added.

"Had we not intervened effectively, the exchange rate would have been at a different level; but the present level doesn't reflect fundamentals" she said. The SBP Governor urged the bankers to educate their clients, including importers and exporters, about true macro-economic fundamentals, and play their role to bring stability in the interbank market, which is not only in the interest of the country but of the banks as well.

She said that banks have a duty to encourage exporters not to hold back export receipts and mobilise foreign exchange funds in the interest of the country. "Let's think of the country...strong economy is also in the interest of the banking industry."

She urged the banks to increase their deposit rates and said that banks should also focus on increasing private sector credit disbursement as it would help the country to remain on a high GDP growth trajectory.

Dr Akhtar said that the central bank realises that some moderate trading is healthy to nurture interbank market and ensure price discovery and liquidity. However, it has been noticed that some banks are engaged in excessive trading, which is detrimental to market discipline.

In the current environment it is not appropriate to indulge in excessive trading, thereby creating undue volatility in the exchange rate. She added that the central bank's advice is that banks' treasuries should maintain strong relationship with their customers. This should help mute excessive volatility. "Customers' excessive shopping with different banks for the same transaction often creates a perception of larger outflows, which is not always the case," she said.

The SBP Governor said that the central bank had conducted a few surprise inspections and it was found that some banks were not following regulations in closing forward import contracts. In some cases, contracts have been closed out at off-market prices, rather than current market prices, she said, and added such practices encouraged customers to take frequent speculative positions, rather than 'true' hedging.

Moreover, she said, it had also been noticed during surprise inspections that a few large cash transactions were going through the FE-25 accounts ie cash deposits followed by TT outflows.

There is also considerable delay in exporters selling their proceeds in the market. "Banks are responsible to ensure compliance with all SBP regulations in this regard, otherwise they will face penalties. We will also increase our vigilance to ensure that export proceeds are realised in time," the Governor asserted.

Dr Akhtar said that the central bank is in no mood to impose any severe administrative controls over the foreign exchange market, and added that it is expected that the market players will behave rationally. "However, if the market fails to discipline itself, the regulator has to fix things," she asserted.

Copyright Business Recorder, 2008